India's Foreign Trade Transformed Since 1947

India's Foreign Trade Transformed Since 1947

Foreign Trade of India: Before and After Independence

Foreign Trade Before Independence

• Before independence, the foreign trade of India was operated on the principles of colonialism.

Foreign Trade After Independence

• But after independence, there have been huge changes in its state and direction.

• After independence, inward-looking foreign trade policies were accepted, and the policy of import replacement was its base.

Volume of India's Foreign Trade

After independence, Indian foreign trade has made cumulative progress both qualitatively and quantitatively.

Though the size of foreign trade and its value both have increased during the post-independence era, this increase in foreign trade cannot be said to be satisfactory because India's share in the total foreign trade of the world has remained remarkably low.

• In 1950, the Indian share in the total world trade was 1.78%, which came down to 0.6% in 1995.

• According to the Economic Survey 2001-02, this share percentage of 0.6% continued in the years 1997 and 1998.

• According to INDIA 2021, in FY 2019-20, India is the 18th largest exporter (1.7% share) and, according to INDIA 2020, the 10th largest importer (2.6% share) of merchandise trade in the world.

Balance of Payments

The current account balance recorded a deficit of 2.0% of GDP in 2022-23 as compared with a deficit of 1.2% in 2021-22 as the trade deficit widened to USD 265.3 billion from USD 189.5 billion a year ago during the period.

Net FDI inflows at USD 28.0 billion in 2022-23 were lower than USD 38.6 billion in 2021-22.

Trade Balance

• According to INDIA 2024, taking merchandise and services together, the overall trade deficit was USD 161.62 billion in FY 2022-23 as compared to USD 83.53 billion during the previous financial year.

Global Perspective

Global Growth

According to the International Monetary Fund's (IMF) World Economic Outlook (WEO) October 2023 update, global growth is estimated to fall from 3.5% in 2022 to 3.0% in 2023 and 2.9% in 2024, well below the historical (2000-19) average of 3.8%.

• Advanced economies are expected to slow from 2.6% in 2022 to 1.5% in 2023 and 1.4% in 2024 as policy tightening starts to bite.

• Emerging market and developing economies are projected to have a modest decline in growth from 4.1% in 2022 to 4.0% in both 2023 and 2024.

Global Inflation

• Global inflation is forecast to decline steadily, from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024, due to tighter monetary policy aided by lower international commodity prices.

[Source: INDIA 2024]

Foreign Trade Policy

New Foreign Trade Policy (FTP) 2023

The new Foreign Trade Policy (FTP) 2023 was launched in April 2023. The policy lays down a blueprint to integrate India with the global markets and make it a reliable and trusted trade partner.

The approach of the new policy is to gradually move away from the incentive-based regime and create an enabling ecosystem to support the philosophy of "Aatmanirbhar Bharat" and "Local goes Global."

Highlights of the New Policy

• Shift from incentives to tax remission

• Greater trade facilitation through technology

• E-commerce exports

• Developing districts as export hubs

The policy aims to take India's goods and services exports to USD 2 trillion by 2030.

[Source: INDIA 2024]

Special Economic Zones (SEZs)

Early Development

India was one of the first countries in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965.

• Seven more zones were set up thereafter.

• To achieve greater economic activity and employment, the Special Economic Zone Act was enacted with a user-friendly regulatory framework.

• The SEZ Act, 2005, supported by SEZ Rules, came into effect on February 10, 2006.

Pre-Existing Export Processing Zones Converted into SEZs

All 8 pre-existing Export Processing Zones (EPZs) were converted into Special Economic Zones (SEZs).

These were located at:

• Kandla and Surat (Gujarat)

• Santa Cruz (Maharashtra)

• Cochin (Kerala)

• Chennai (Tamil Nadu)

• Visakhapatnam (Andhra Pradesh)

• Falta (West Bengal)

• Noida (Uttar Pradesh)

SEZs under the SEZ Act, 2005

• SEZs being set up under the SEZ Act, 2005, are primarily private investment-driven.

[Source: INDIA 2021]

Present Status of SEZs

There are 275 operational Special Economic Zones (SEZs) in the country till June 2023.

• Out of this, 166 are IT/ITES, and the other 109 are multi-sector SEZs.

[Source: INDIA 2024]

Red Sea Crisis

The ongoing crisis in the Red Sea shipping route is having an impact on global food prices, with longer cargo travel distances and higher freight rates potentially leading to an increase in cost.

The UNCTAD report highlights that the Suez Canal experienced a drop in transits by 42% and 49%, respectively, in January 2024 compared to their peak levels.

Impact on the Global Economy

Change in Trade Route

• Container ships routing through the Suez Canal are shunning and rerouting around the Cape of Good Hope.

• By the first half of February 2024, container tonnage crossing the canal fell by 82%, and vessel tonnage passing through the Cape of Good Hope increased by 60%.

Increase in Distance and Operational Shift

The extra miles travelled and days lost due to trade diversion have translated into additional costs such as:

• Fuel costs

• Lost value of time-sensitive cargo

• Insurance and legal claims (due to security risks, including piracy)

Impact on India

80% of India's merchandise trade with Europe passes through the Red Sea, with key products such as crude oil, auto & auto ancillaries, chemicals, textiles, and iron & steel being affected.

The combined impact of higher freight costs, insurance premiums, and longer transit times could make imported goods significantly more expensive.

Sectoral Impact

• A CRISIL report highlighted that a sustained disruption in trade routes holds the potential to impact the capital goods sector, with ripple effects potentially leading to undesirable inventory buildup.

• The conflict has impacted the Middle East's fertilizer exports to India, as imports of muriate of potash from Jordan and Israel have been affected.

• BMI (a Fitch Solutions Company) shows that the crisis will impact economic growth and inflation across Asia.

Regional Impact

• Asian economies such as China, Japan, India, and South Korea are among the largest net oil importers globally.

• Continued shipping disruptions could hit Asia.

• A rise in oil prices may pose upside risks to inflation and consequently to growth.

India’s Trade and Services Performance

Merchandise Trade

• According to the Monthly Economic Report (February 2024) of the Department of Economic Affairs (DoEA), Govt. of India, merchandise exports were lower by 3.3% from April 23 to February 24 (year-on-year basis).

• DGCIS data reflects a remarkable increase in the volume of key imports, such as petroleum products, oilseeds, fertilizers, and gold, from April 23 to January 24 compared to the corresponding period of the previous year.

• Due to a fall in global commodity prices, the overall value of merchandise imports was 5.2% lower from April 23 to February 24 compared to the first 11 months of FY23.

• Accordingly, India's merchandise trade deficit narrowed from USD (-) 245.9 billion (FY23, first 11 months) to USD (-) 225.3 billion (FY24, same period).

Services Exports

• Services exports stood at USD 314.8 billion in the first 11 months of FY24, recording a growth of 6.8% over the corresponding period of FY23.

• Software and business services together constitute around 75% of India's total services exports and exhibited strong growth in FY24.

• Rising services exports, coupled with a fall in imports, rose from USD 129.8 billion in FY23 (first 11 months) to USD 153 billion in FY24 (same period).

Final Thoughts

India’s foreign trade has transformed significantly since independence, moving from colonial patterns to policies like import substitution and later, global integration. Despite steady growth, India’s share in world trade has remained modest, though it is now among the top exporters and importers globally.

The Foreign Trade Policy 2023 reflects this shift, aiming for USD 2 trillion in exports by 2030 with initiatives like e-commerce promotion and export hubs. Special Economic Zones (SEZs), first started in Kandla in 1965, now number 275 across the country, driving private investment and job creation.

However, external challenges such as the Red Sea crisis highlight India’s trade vulnerabilities. With 80% of India’s Europe-bound trade passing through this route, higher freight costs and delays are straining key sectors like oil, chemicals, and textiles. Reports warn of ripple effects on inflation and growth across Asia. Yet, there are positives too: India’s services exports, especially in software and business services, continue to grow strongly, helping offset merchandise trade deficits.